The hard facts about spending cuts

Commentary: Americans need to face the taxes vs. spending dilemma

NEW YORK (MarketWatch) — As lawmakers negotiate to avoid the so-called fiscal cliff, the combination of tax increases and spending cuts that are due to take place on Jan.1, 2013, the silence on spending cuts is deafening.

That’s odd, since federal outlays have risen from 20% of GDP in 2008 to 24% in 2012, far above the postwar historical average of 20%.

House Republicans, both in the budget committee and in the Republican Study Committee, have outlined potential cuts that will bring spending back down to 2008 pre-recession levels. However, all Washington negotiators can do is talk about raising taxes, or not, and how much revenue can come from limiting deductions on one hand and economic growth on the other.

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It appears that discussion of spending cuts is so poisonous, despite the run-up in spending over the past four years, that cuts cannot even be the subject of discussion.

If Americans want to run a European-style welfare state, America needs a European level of taxes. In the 27 countries of the European Union, outlays as a percent of GDP average 49%, according to the EU’s statistical arm Eurostat. Tax revenues average 39% of GDP. However, as we read daily, Europeans have not avoided deficits and fiscal chaos with their high levels of taxes. Far from it.

Alternatively, do Americans want to keep the concept of entitlements as a safety net for low-income Americans, rather than those in the middle-class, which would move America back to historical levels of outlays?

This is the question that Congress and the public are not debating.

In my view, the European route is to be avoided. Not only is Europe’s economy disintegrating, but as an immigrant from Europe who has seen the welfare state in practice — the lengthy waits to see doctors, the disincentives to work caused by unemployment benefits — I see cutting spending back to historical levels as preferable to permanent state expansion.

But cuts are not easy. Last year twelve members of the Super Committee, Republicans and Democrats, senators and representatives, failed to cut $1.2 trillion from the budget over the next decade, paving the way for the sequester of $110 billion to take effect on Jan. 1, half in defense and half in nonsecurity discretionary spending.

The Congressional Budget Office projects that federal spending over the next decade will be $44 trillion, so cutting $1.2 trillion is less than 3% of federal spending. In fact, $1.2 trillion is less than America’s deficit for fiscal year 2011.

Under the sequester, spending does not even decline, according to the CBO projections, but continues to grow steadily. Few realize that congressional spending cuts for a given year are not subtracted from the prior year’s spending. Rather, cuts are subtracted from a budget that grows on autopilot, particularly entitlement programs.

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Under the sequester entitlement programs such as Medicare, Medicaid, and Social Security are projected to continue to grow rapidly. That explains how Congress can say that it is cutting spending over 10 years, yet produces a series of budgets that continue to grow.

Congress must at some point decide how to reduce spending in Social Security, Medicare, and Medicaid, which are taking an increasing share of the federal budget. It needs to cut far more than $1.2 trillion over the next decade in order to avoid Europe’s debacle.

The House passed a budget that cuts $5 trillion over the next ten years and reduces outlays to 20 percent of GDP by 2015. Details can be found here. Read “The Path to Prosperity.”

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